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Today on Face the Nation (hosted by fellow Horned Frog, Bob Schieffer), I heard Mitt Romney add his voice to the chorus of those saying that economic recovery would follow if only we relieved the terrible burden that the government has placed on the nation’s job creators: business. Were taxes and regulations relaxed, this would reduce costs sufficiently to allow firms to do what they are already dying to do, which is expand operations.

But even if we grant the argument that business taxes and regulations are high (which is by no means clear–in fact, it's easier to make a case for the opposite), this ignores two crucial facts. First, as my friend Mike Norman has pointed out, employees are a cost, usually the most significant one faced by firms (Mike Norman Economics). For that reason, every rational entrepreneur’s goal is to reduce, not increase, the number of workers they have to pay. And quite right. Entrepreneurs have families, too, and they need to feed and clothe them. It would be irresponsible to do otherwise.

Second and more fundamentally, no matter how much you lower costs, if you don’t have more customers, you won’t hire more workers. If the demand for goods and services stays where it is today and we only cut industry taxes and regulations, there is absolutely no reason to think that firms would expand employment. Rather, they would continue to produce at the same level and simply earn higher profits. On the other hand, if we leave taxes and regulations untouched but increase demand, entrepreneurs will happily add workers. And that is the root of the problem today. The bottom line, lost on Mr. Romney and many others, is that the real job creators are consumers. The direct route to reducing unemployment is boosting demand, not reducing costs.

Ask yourself this question: what do you really think caused firms to lay off so many workers that unemployment jumped from 4.4% in May 2007 to 10% in October 2009 (remaining at 8.2% today), a sudden spike in business regulations and taxes, or a collapse in demand? It is impossible to imagine that anyone truly believes the former to be the case. In reality, the reason we are stuck where we are is because the middle class lacks jobs and incomes--something that will get markedly worse if we continue to try to cut government spending and balance the budget (many of my other blog posts cover this issue so I'll say no more here).

In conclusion, let me add my voice to the chorus of those who actually understand what’s happening in our economy: WE DEMAND AGGREGATE DEMAND!